Joseph Sondheimer Professor of International Economics, Finance and Accounting

Christian Leuz is the Joseph Sondheimer Professor of International Economics, Finance and Accounting at the University of Chicago's Booth School of Business. He is also a Co-Director of the Initiative on Global Markets, a Research Associate at the National Bureau of Economic Research, and a Fellow at the at the European Corporate Governance Institute, Wharton's Financial Institution Center, Goethe Universität Frankfurt's Center for Financial Studies, and the CESifo Research Network. He studies the role of disclosure and transparency in capital markets and other settings, the effects of regulation, international accounting as well as corporate governance and corporate financing decisions. His work has been published in top accounting and finance journals. He has received several awards and honors, including the 2016 and the 2014 Distinguished Contribution to the Accounting Literature Awards, the Humboldt Research Award in 2012, as well as the 2011 Wildman Medal Award. He was also recognized as a “Highly Cited Researchers" by Thomson Reuters and included in their list of “The World’s Most Influential Scientific Minds” in 2014 and 2015. Professor Leuz is an editor for the Journal of Accounting Research and has served on many editorial boards, including the Journal of Accounting & Economics, The Accounting Review, the Journal of Business, Finance and Accounting, and the Review of Accounting Studies.

Born in Germany, Professor Leuz earned his doctoral degree and Habilitation at the Goethe University Frankfurt in Germany. Prior to this position, he was the Harold Stott Term Assistant Professor in Accounting at the Wharton School of the University of Pennsylvania and a visiting doctoral fellow at the Simon School of Business, University of Rochester.

REVISION: The Twilight Zone: OTC Regulatory Regimes and Market Quality
Date Posted:
Nov 21,
2016
We analyze a comprehensive sample of more than 10,000 U.S. OTC stocks. We provide much needed descriptive evidence on this market and show that the OTC market is a large, diverse, and dynamic trading environment with a rich set of regulatory and disclosure regimes, comprising venue rules and state laws beyond SEC regulation. We also exploit the institutional richness of the OTC market and analyze two key dimensions of market quality, liquidity and crash risk, across firms and regulatory regimes. We find that OTC firms that are subject to stricter regulatory regimes and disclosure requirements have higher market quality (higher liquidity and lower crash risk). Our analysis points to an important trade-off in regulating the OTC market and protecting investors: Lowering regulatory requirements (e.g., for disclosure) reduces the compliance burden for smaller firms, but also reduces market quality.

New: Capital-Market Effects of Securities Regulation: Prior Conditions, Implementation, and Enforcement
Date Posted:
Oct 15,
2016
We examine the capital-market effects of changes in securities regulation in the European Union (EU) aimed at reducing market abuse and increasing transparency. To estimate causal effects for the population of EU firms, we exploit that for plausibly exogenous reasons, like national legislative procedures, EU countries adopted these directives at different times. We find significant increases in market liquidity, but the effects are stronger in countries with stricter implementation and traditionally more stringent securities regulation. The findings suggest that countries with initially weaker regulation do not catch up with stronger countries, and that countries diverge more upon harmonizing regulation.

Update: The Effect of Regulatory Harmonization on Cross-Border Labor Migration: Evidence from the Accounting Profession
Date Posted:
Oct 04,
2016
The paper examines whether international regulatory harmonization increases cross-border labor migration. To study this question, we analyze European Union (EU) initiatives that harmonized accounting and auditing standards. Regulatory harmonization should reduce economic mobility barriers, essentially making it easier for accounting professionals to move across countries. Our research design compares the cross-border migration of accounting professionals relative to tightly-matched other professionals before and after regulatory harmonization. We find that international labor migration in the accounting profession increases significantly relative to other professions. We provide evidence that this effect is due to harmonization, rather than increases in the demand for accounting services during the implementation of the rule changes. The findings illustrate that diversity in rules constitutes an economic barrier to cross-border labor mobility and, more specifically, that accounting ...New PDF Uploaded

REVISION: The Effect of Regulatory Harmonization on Cross-Border Labor Migration: Evidence from the Accounting Profession
Date Posted:
Sep 21,
2016
The paper examines whether international regulatory harmonization increases cross-border labor migration. To study this question, we analyze European Union (EU) initiatives that harmonized accounting and auditing standards. Regulatory harmonization should reduce economic mobility barriers, essentially making it easier for accounting professionals to move across countries. Our research design compares the cross-border migration of accounting professionals relative to tightly-matched other professionals before and after regulatory harmonization. We find that international labor migration in the accounting profession increases significantly relative to other professions. We provide evidence that this effect is due to harmonization, rather than increases in the demand for accounting services during the implementation of the rule changes. The findings illustrate that diversity in rules constitutes an economic barrier to cross-border labor mobility and, more specifically, that accounting ...

REVISION: The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research
Date Posted:
Sep 09,
2016
This paper discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation, drawing on U.S. and international evidence. Given the policy relevance of research on regulation, we highlight the challenges with (1) quantifying regulatory costs and benefits, (2) measuring disclosure and reporting outcomes, and (3) drawing causal inferences from regulatory studies. Next, we discuss empirical studies that link disclosure and reporting activities to firm-specific and market-wide economic outcomes. Understanding these links is important when evaluating regulation. We then synthesize the empirical evidence on the economic effects of disclosure regulation and reporting standards, including the evidence on International Financial Reporting Standards (IFRS) adoption. Several important conclusions emerge. We generally lack evidence on market-wide effects and externalities from regulation, yet such evidence is central to the economic justification of ...

REVISION: Capital-Market Effects of Securities Regulation: Prior Conditions, Implementation, and Enforcement
Date Posted:
Apr 06,
2016
We examine the capital-market effects of changes in securities regulation in the European Union (EU) aimed at reducing market abuse and increasing transparency. To estimate causal effects for the population of EU firms, we exploit that for plausibly exogenous reasons, like national legislative procedures, EU countries adopted these directives at different times. We find significant increases in market liquidity, but the effects are stronger in countries with stricter implementation and traditionally more stringent securities regulation. The findings suggest that countries with initially weaker regulation do not catch up with stronger countries, and that countries diverge more upon harmonizing regulation.

REVISION: The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research
Date Posted:
Mar 09,
2016
This paper discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation (including IFRS adoption), drawing on U.S. and international evidence. Given the policy relevance of research on regulation, we highlight the challenges with: (i) quantifying regulatory costs and benefits, (ii) measuring disclosure and reporting outcomes, and (iii) drawing causal inferences from regulatory studies. Next, we discuss empirical studies that link disclosure and reporting activities to firm-specific and market-wide economic outcomes. Understanding these links is important when evaluating regulation. We then synthesize the empirical evidence on the economic effects of disclosure regulation and reporting standards, including the evidence on IFRS adoption. Several important conclusions emerge. We generally lack evidence on market-wide effects and externalities from regulation, yet such evidence is central to the economic justification of regulation. ...

REVISION: Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Inspection Regime
Date Posted:
Sep 23,
2015
This paper examines how audit oversight by a public-sector regulator affects investors’ assessments of reporting credibility. We analyze whether the introduction of the Public Company Accounting Oversight Board (PCAOB) and its inspection regime have strengthened capital-market responses to unexpected earnings releases, as theory predicts when reporting credibility increases. To identify the effects, we use a difference-in-differences design that exploits the staggered introduction of the inspection regime, which affects firms at different points in time depending on their fiscal year-ends, auditors, and the timing of PCAOB inspections. We find that capital-market responses to unexpected earnings increase significantly following the introduction of the PCAOB inspection regime. Corroborating these findings, we also find an increase in abnormal volume responses to firms’ 10-K filings after the new regime. Overall, our results are consistent with public audit oversight increasing the ...

New: Mandatory IFRS Reporting and Changes in Enforcement
Date Posted:
Dec 07,
2013
In recent years, reporting under International Financial Reporting Standards (IFRS) became mandatory in many countries. The capital-market effects around this change have been extensively studied, but their sources are not yet well understood. This study aims to distinguish between several potential explanations for the observed capital-market effects. We find that, across all countries, mandatory IFRS reporting had little impact on liquidity. The liquidity effects around IFRS introduction are concentrated in the European Union (EU) and limited to five EU countries that concurrently made substantive changes in reporting enforcement. There is little evidence of liquidity benefits in IFRS countries without substantive enforcement changes even when they have strong legal and regulatory systems. Moreover, we find similar liquidity effects for firms that experience enforcement changes but do not concurrently switch to IFRS. Thus, changes in reporting enforcement or (unobserved) factors ...

REVISION: Mandatory IFRS Reporting and Changes in Enforcement
Date Posted:
Nov 04,
2013
In recent years, reporting under International Financial Reporting Standards (IFRS) became mandatory in many countries. The capital-market effects around this change have been extensively studied, but their sources are not yet well understood. This study aims to distinguish between several potential explanations for the observed capital-market effects. We find that, across all countries, mandatory IFRS reporting had little impact on liquidity. The liquidity effects around IFRS introduction are concentrated in the European Union (EU) and limited to five EU countries that concurrently made substantive changes in reporting enforcement. There is little evidence of liquidity benefits in IFRS countries without substantive enforcement changes even when they have strong legal and regulatory systems. Moreover, we find similar liquidity effects for firms that experience enforcement changes but do not concurrently switch to IFRS. Thus, changes in reporting enforcement or (unobserved) factors ...

REVISION: Proper Inferences or a Market for Excuses? The Capital-Market Effects of Mandatory IFRS Adoption
Date Posted:
Oct 12,
2013
Barth and Israeli (2013) raise five serious concerns regarding the research design and interpretation of Christensen, Hail, and Leuz (2013). They claim: (i) the evidence stands in stark contrast to Daske, Hail, Leuz, and Verdi (2008) and fails to replicate its prior findings; (ii) the research design using fixed effects leaves out main effects and two-way interactions which likely biases the estimated liquidity effects around IFRS adoption and changes in enforcement; (iii) the vast majority of sample observations do not contribute to the identification which is misleading in terms of the scope and the conclusions that can be drawn from the study; (iv) the timing of IFRS adoption and enforcement changes is measured imprecisely leading to low power tests; and (v) the evidence from Japan is irrelevant to the study. In this note, we show that all five claims are incorrect or misleading. Our discussion also more broadly describes how to properly interpret the fixed-effect specifications ...

REVISION: Adopting a Label: Heterogeneity in the Economic Consequences Around IAS/IFRS Adoptions
Date Posted:
Apr 21,
2013
This study examines liquidity and cost of capital effects around voluntary and mandatory IAS/IFRS adoptions. In contrast to prior work, we focus on the firm-level heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement the new standards. Some firms may make very few changes and adopt IAS/IFRS more in name, while for others the change in standards could be part of a strategy to increase their commitment to transparency. To test these ...

REVISION: Adopting a Label: Heterogeneity in the Economic Consequences Around IAS/IFRS Adoptions
Date Posted:
Mar 08,
2013
This study examines liquidity and cost of capital effects around voluntary and mandatory IAS/IFRS adoptions. In contrast to prior work, we focus on the firm-level heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement the new standards. Some firms may make very few changes and adopt IAS/IFRS more in name, while for others the change in standards could be part of a strategy to increase their commitment to transparency. To test these ...

REVISION: The Economic Consequences of Increased Disclosure
Date Posted:
Feb 23,
2013
Economic theory suggests that a commitment by a firm to increased levels of disclosure should lower the information asymmetry component of the firm's cost of capital. But while the theory is compelling, so far empirical results relating increased levels of disclosure to measurable economic benefits have been mixed. One explanation for the mixed results among studies using data from firms publicly registered in the US is that, under current US reporting standards, the disclosure environment is ...

REVISION: Information Asymmetry, Information Precision, and the Cost of Capital
Date Posted:
May 02,
2011
The consequences of information differences across investors in capital markets are still much debated. This paper examines the relation between information differences across investors and the cost of capital, and makes three points. First, in models of perfect competition, information differences across investors affect a firm's cost of capital through investors' average information precision, and not information asymmetry per se. Second, the average information precision effect is unlikely ...

New: Information Asymmetry, Information Precision, and the Cost of Capital
Date Posted:
Apr 26,
2011
This paper examines the relation between information differences across investors (i.e., information asymmetry) and the cost of capital, and establishes that with perfect competition information asymmetry makes no difference. Instead, a firm’s cost of capital is governed solely by the average precision of investors’ information. With imperfect competition, however, information asymmetry affects the cost of capital even after controlling for investors’ average precision. In other words, the ...

REVISION: Why Do Firms Go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations
Date Posted:
Feb 13,
2011
We examine a comprehensive sample of going-dark deregistrations where companies cease SEC reporting, but continue to trade publicly. We document a spike in going dark that is largely attributable to the Sarbanes-Oxley Act. Firms experience large negative abnormal returns when going dark. We find that many firms go dark due to poor future prospects, distress and increased compliance costs after SOX. But we also find evidence suggesting that controlling insiders take their firms dark to protect ...

New: Global Accounting Convergence and the Potential Adoption of IFRS by the U.S. (Part II): Political Fa
Date Posted:
Dec 18,
2010
This is the second article of a two-part series analyzing the economic and policy factors related to the potential adoption of IFRS by the United States. In Part I (see Hail et al. 2010), we develop the conceptual framework for our analysis and discuss economic factors driving the costs and benefits associated with IFRS adoption. In this part, we provide an analysis of the political factors related to the possible U.S. adoption of IFRS, present several scenarios for the evolution of U.S ...

New: Global Accounting Convergence and the Potential Adoption of IFRS by the U.S. (Part I): Conceptual Un
Date Posted:
Sep 09,
2010
This article is Part I of a two-part series analyzing the economic and policy factors related to the potential adoption of IFRS by the United States. In this part, we develop the conceptual framework for our analysis of potential costs and benefits from IFRS adoption in the United States. Drawing on the academic literature in accounting, finance and economics, we assess the potential impact of IFRS adoption on the quality and comparability of U.S. reporting practices, the ensuing capital ...

REVISION: Different Approaches to Corporate Reporting Regulation: How Jurisdictions Differ and Why
Date Posted:
May 30,
2010
This paper discusses differences in countries’ approaches to reporting regulation and explores the reasons why they exist in the first place as well as why they are likely to persist. I first delineate various regulatory choices and discuss the tradeoffs associated with these choices. I also provide a framework that can explain differences in corporate reporting regulation. Next, I present descriptive and stylized evidence on regulatory and institutional differences across countries. There are ...

New: Did Fair-Value Accounting Contribute to the Financial Crisis?
Date Posted:
Mar 22,
2010
The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value ...

REVISION: Capital Market Effects of Mandatory IFRS Reporting in the EU: Empirical Evidence
Date Posted:
Dec 17,
2009
This report provides a review of the academic literature relevant to the mandatory adoption of IFRS reporting for member countries of the European Union in 2005 and an empirical analysis of the associated capital-market effects. In the empirical analysis, we focus on the effects on firms' costs of capital and market liquidity. More specifically, we analyze the effect of mandated IFRS reporting on the implied cost of equity capital, percentage bid-ask spreads, the price impact of trades and the ...

REVISION: Did Fair-Value Accounting Contribute to the Financial Crisis?
Date Posted:
Dec 15,
2009
The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value accounting ...

Adopting a Label: Heterogeneity in the Economic Consequences of IFRS Adoptions
Date Posted:
Nov 08,
2009
This paper examines market liquidity and cost of capital effects associated with voluntary IFRS adoptions around the world. In contrast to prior work, we focus on the heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement IFRS. Some firms may simply adopt the label, while for others IFRS adoption may be part of a strategy to increase their commitment to transparency. To illustrate these differences, we classify firms into ‘label’ ...

REVISION: Adopting a Label: Heterogeneity in the Economic Consequences of IFRS Adoptions
Date Posted:
Nov 08,
2009
This paper examines market liquidity and cost of capital effects associated with voluntary IFRS adoptions around the world. In contrast to prior work, we focus on the heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement IFRS. Some firms may simply adopt the label, while for others IFRS adoption may be part of a strategy to increase their commitment to transparency. To illustrate these differences, we classify firms into ‘label’ ...

REVISION: Cost of Capital Effects and Changes in Growth Expectations Around U.S. Cross-Listings
Date Posted:
Aug 26,
2009
This paper examines whether cross-listing in the U.S. reduces foreign firms' costs of capital. While prior studies show that U.S. cross-listings are associated with substantial increases in firm value, the sources of these valuation effects are not well understood. We estimate cost of capital effects implied by market prices and analyst forecasts, which accounts for changes in growth expectations around cross-listings. We find strong evidence that firms with cross-listings on U.S. exchanges ...

New: Do Foreigners Invest Less in Poorly Governed Firms?
Date Posted:
Aug 12,
2009
As domestic sources of outside finance are limited in many countries around the world, it is important to understand factors that influence whether foreign investors provide capital to a country's firms. We study 4,409 firms from twenty-nine countries to assess whether and why concerns about corporate governance result in fewer foreign holdings. We find that foreigners invest less in firms that reside in countries with poor outsider protection and disclosure and have ownership structures that ...

New: Disclosure and the Cost of Capital: Evidence from Firms’ Responses to the Enron Shock
Date Posted:
May 28,
2009
This paper examines the link between disclosure and the cost of capital. We exploit an exogenous cost of capital shock created by the Enron scandal in Fall 2001 and analyze firms’ disclosure responses to this shock. These tests are opposite to the typical research design that analyzes cost of capital responses to disclosure changes. In reversing the tests and using an exogenous shock, we mitigate concerns about omitted variables in traditional cross-sectional disclosure studies. We estimate ...

New: Information Asymmetry, Information Precision, and the Cost of Capital
Date Posted:
Apr 29,
2009
The consequences of information differences across investors in capital markets are still much debated. This paper examines the relation between information differences across investors and the cost of capital, and makes three points. First, in models of perfect competition, information differences across investors affect a firm's cost of capital through investors' average information precision, and not information asymmetry per se. Second, the average precision effect of information that is ...

New: The Crisis of Fair Value Accounting: Making Sense of the Recent Debate
Date Posted:
Apr 21,
2009
The recent financial crisis has led to a vigorous debate about the pros and cons of fair-value accounting (FVA). This debate presents a major challenge for FVA going forward and standard setters’ push to extend FVA into other areas. In this article, we highlight four important issues as an attempt to make sense of the debate. First, much of the controversy results from confusion about what is new and different about FVA. Second, while there are legitimate concerns about marking to market ...

REVISION: Disclosure and the Cost of Capital: Evidence from Firms' Response to the Enron Shock
Date Posted:
Mar 20,
2009
This paper examines the link between disclosure and the cost of capital. We exploit an exogenous cost of capital shock that the Enron scandal in Fall 2001 created for other U.S. firms and analyze whether and how firms respond to this shock. These tests are opposite to the typical research design that analyzes cost of capital responses to disclosure changes. In reversing the tests and using an exogenous shock, we mitigate endogeneity concerns in traditional cross-sectional disclosure studies ...

New: Global Accounting Convergence and the Potential Adoption of IFRS by the United States: An Analysis o
Date Posted:
Mar 11,
2009
Drawing on the academic literature in accounting, finance and economics, we analyze economic and policy factors related to the potential adoption of International Financial Reporting Standards (IFRS) in the U.S. We highlight the unique institutional features of U.S. markets to assess the potential impact of IFRS adoption on the quality and comparability of U.S. reporting practices, the ensuing capital market effects, and the potential costs of switching from U.S. GAAP to IFRS. We discuss the ...

REVISION: Cost of Capital Effects and Changes in Growth Expectations around U.S. Cross-Listings
Date Posted:
Nov 25,
2008
This paper examines whether cross-listing in the U.S. reduces foreign firms' costs of capital. While prior studies show that U.S. cross-listings are associated with substantial increases in firm value, the sources of these valuation effects are not well understood. We estimate cost of capital effects implied by market prices and analyst forecasts, which accounts for changes in growth expectations around cross-listings. We find strong evidence that firms with cross-listings on U.S. exchanges ...

IAS versus US GAAP: Information Asymmetry-Based Evidence from Germany's New Market
Date Posted:
Nov 06,
2008
The competition between IAS and US GAAP to become the global accounting standard has created a debate about the relative quality of the two standards. This paper compares IAS and US GAAP in terms of information asymmetry and market liquidity - two key constructs in securities regulation. It uses firms trading in Germany's New Market, which must choose between IAS and US GAAP in preparing their financial statements, but face the same regulatory environment. That is, institutional factors, such ...

REVISION: Mandatory IFRS Reporting Around the World: Early Evidence on the Economic Consequences
Date Posted:
Oct 24,
2008
This paper examines the economic consequences of mandatory IFRS reporting around the world. We analyze the effects on market liquidity, cost of capital and Tobin's q in 26 countries using a large sample of firms that are mandated to adopt IFRS. We find that, on average, market liquidity increases around the time of the introduction of IFRS. We also document a decrease in firms' cost of capital and an increase in equity valuations, but only if we account for the possibility that the effects ...

REVISION: Mandatory IFRS Reporting Around the World: Early Evidence on the Economic Consequences
Date Posted:
Sep 08,
2008
This paper examines the economic consequences of the introduction of mandatory IFRS reporting across the world. We analyze the effects on market liquidity, cost of equity capital and Tobin's q in 26 countries using a large sample that includes over 3,800 first-time adopters. We find that market liquidity and equity valuations increase around the time of the mandatory introduction of IFRS. The results for firms' cost of capital are mixed. Partitioning our sample, we find that the capital-market ...

REVISION: Do Foreigners Invest Less in Poorly Governed Firms?
Date Posted:
Mar 31,
2008
As domestic sources of outside finance are limited in many countries around the world, it is important to understand factors that influence whether foreign investors provide capital to a country's firms. We study 4,409 firms from 29 countries to assess whether and why concerns about corporate governance result in fewer foreign holdings. We find that foreigners invest less in firms that reside in countries with poor outsider protection and disclosure and have ownership structures that are ...

REVISION: Economic Consequences of Financial Reporting and Disclosure Regulation: A Review and Suggestions for
Date Posted:
Mar 26,
2008
This paper surveys the theoretical and empirical literature on the economic consequences of financial reporting and disclosure regulation. We integrate theoretical and empirical studies from accounting, economics, finance and law in order to contribute to the cross-fertilization of these fields. We provide an organizing framework that identifies firm-specific (micro-level) and market-wide (macro-level) costs and benefits of firms' reporting and disclosure activities and then use this framework ...

New: Do Foreigners Invest Less in Poorly Governed Firms?
Date Posted:
Mar 19,
2008
As domestic sources of outside finance are limited in many countries around the world, it is important to understand factors that influence whether foreign investors provide capital to a country's firms. We study 4,409 firms from 29 countries to assess whether and why concerns about corporate governance result in fewer foreign holdings. We find that foreigners invest less in firms that reside in countries with poor outsider protection and disclosure and have ownership structures that are ...

New: Why Do Firms Go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations
Date Posted:
Mar 18,
2008
We examine a comprehensive sample of going-dark deregistrations where companies cease SEC reporting, but continue to trade publicly. We document a spike in going dark that is largely attributable to the Sarbanes-Oxley Act. Firms experience large negative abnormal returns when going dark. We find that many firms go dark due to poor future prospects, distress and increased compliance costs after SOX. But we also find evidence suggesting that controlling insiders take their firms dark to protect ...

REVISION: Earnings Management and Investor Protection: An International Comparison
Date Posted:
Mar 16,
2008
This paper examines the pervasiveness of earnings management across 31 countries between 1990 and 1999. It documents systematic differences in earnings management across different clusters of countries. We propose an explanation for these differences based on the notion that insiders, in an attempt to protect their private control benefits, use earnings management to conceal firm performance from outsiders. Thus, earnings management is expected to decrease in investor protection because strong ...

REVISION: Political Relationships, Global Financing and Corporate Transparency: Evidence from Indonesia
Date Posted:
Mar 16,
2008
This study examines the role of political connections for firms' financing strategies and their long-run financial performance. We view political connections as an example for domestic arrangements which can reduce the benefits of global financing. Consistent with this argument, we find that firms with close political ties are less likely than firms with weak connections to have publicly traded foreign securities. We also show that estimates of the performance consequences of foreign ...

New: Accounting Information, Disclosure, and the Cost of Capital
Date Posted:
Feb 18,
2008
In this paper we examine whether and how accounting information about a firm manifests in its cost of capital, despite the forces of diversification. We build a model that is consistent with the Capital Asset Pricing Model and explicitly allows for multiple securities whose cash flows are correlated. We demonstrate that the quality of accounting information can influence the cost of capital, both directly and indirectly. The direct effect occurs because higher quality disclosures affect the ...

REVISION: The Importance of Reporting Incentives: Earnings Management in European Private and Public Firms
Date Posted:
Jan 02,
2008
This paper examines how capital market pressures and institutional factors shape firms' incentives to report earnings that reflect economic performance. To isolate the effects of reporting incentives, we exploit the fact that, within the European Union, privately held corporations face the same accounting standards as publicly traded companies because accounting regulation is based on legal form. We focus on the level of earnings management as one dimension of accounting quality that is ...

REVISION: International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regula
Date Posted:
Jan 02,
2008
This paper examines international differences in firms' cost of equity capital across 40 countries. We analyze whether the effectiveness of a country's legal institutions and securities regulation is systematically related to cross-country differences in the cost of equity capital. We employ several models to estimate firms' implied or ex ante cost of capital. Our results support the conclusion that firms from countries with more extensive disclosure requirements, stronger securities ...

REVISION: Was the Sarbanes-Oxley Act of 2002 Really this Costly? A Discussion of Evidence from Event Returns a
Date Posted:
Jun 18,
2007
This paper discusses evidence on the costs (and benefits) of the Sarbanes-Oxley Act (SOX) from stock returns and firms' going-private decisions. Zhang (2006) analyzes stock returns around key legislative events and concludes that SOX and its provisions have imposed significant net costs on firms. Engel et al. (2006) examine going-private decisions before and after SOX and point to unintended consequences of SOX. Both studies are carefully conducted and deserve praise for tackling a timely and ...

New: Accounting Information, Disclosure, and the Cost of Capital
Date Posted:
Jan 08,
2007
In this paper we examine whether and how accounting information about a firm manifests in its cost of capital, despite the forces of diversification. We build a model that is consistent with the CAPM and explicitly allows for multiple securities whose cash flows are correlated. We demonstrate that the quality of accounting information can influence the cost of capital, both directly and indirectly. The direct effect occurs because higher quality disclosures reduce the firm's assessed ...

REVISION: Information Asymmetry, Information Precision, and the Cost of Capital
Date Posted:
Dec 13,
2006
The consequences of information differences across investors in capital markets are still much debated. This paper examines the relation between information differences across investors and the cost of capital. Our analysis makes three salient points. First, in models of perfect competition, information differences across investors affect a firm's cost of capital through investors' average information precision, and not information asymmetry per se. Second, the average information precision ...

New: Cost of Capital Effects and Changes in Growth Expectations around U.S. Cross-Listings
Date Posted:
Nov 15,
2006
This paper examines whether cross-listing in the U.S. reduces foreign firms' cost of capital. While prior studies document that U.S. cross-listings are associated with substantial increases in firm value, the sources of these valuation effects are not well understood. We estimate the cost of capital effects implied by market prices and analyst forecasts, which allows us to explicitly account for changes in growth expectations around cross-listings. We find strong evidence that firms with ...

New: Cost of Capital Effects and Changes in Growth Expectations around U.S. Cross-Listings
Date Posted:
Nov 15,
2006
This paper examines whether cross-listing in the U.S. reduces foreign firms' cost of capital. While prior studies document that U.S. cross-listings are associated with substantial increases in firm value, the sources of these valuation effects are not well understood. We estimate the cost of capital effects implied by market prices and analyst forecasts, which allows us to explicitly account for changes in growth expectations around cross-listings. We find strong evidence that firms with ...

New: Political Relationships, Global Financing, and Corporate Transparency: Evidence from Indonesia
Date Posted:
Aug 02,
2006
This study examines the role of political connections in firms' financing strategies and their long-run performance. We view political connections as an example for domestic arrangements which can reduce the benefits of global financing. Using data from Indonesia, we find that firms with strong political connections are less likely to have publicly traded foreign securities. As a result, estimates of the performance consequences of foreign financing are severely biased if value-creating ...

New: Do Foreigners Invest Less in Poorly Governed Firms?
Date Posted:
Jul 23,
2006
As domestic sources of outside finance are limited in many countries around the world, it is important to understand the factors that influence whether foreign outside investors provide capital to a country's firms. This study examines whether and why investor concern about corporate governance results in fewer foreign holdings. We use a comprehensive set of foreign holdings by U.S. investors as a proxy for foreign investment and analyze a sample of 4,411 firms from 29 emerging market and ...

New: Cross Listing, Bonding and Firms' Reporting Incentives: A Discussion
Date Posted:
Jun 30,
2006
Lang, Raedy and Wilson (JAE 2006) compare the properties of U.S. GAAP accounting numbers across cross-listed and U.S. firms. Using a wide range of properties, LRW show that accounting data are not comparable, even though sample firms use the same accounting standards. I discuss how these findings advance the literature and what they imply for the effectiveness of cross listing as a bonding mechanism. My discussion highlights that documented differences cannot be solely attributed to weak U.S ...

REVISION: International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regula
Date Posted:
Apr 27,
2006
This paper examines international differences in firms' cost of equity capital across 40 countries. We analyze whether the effectiveness of a country's legal institutions and securities regulation is systematically related to cross-country differences in the cost of equity capital. We employ several models to estimate firms' implied or ex ante cost of capital. Our results support the conclusion that firms from countries with more extensive disclosure requirements, stronger securities ...

REVISION: Accounting Information, Disclosure, and the Cost of Capital
Date Posted:
Mar 31,
2006
In this paper we examine whether and how accounting information about a firm manifests in its cost of capital, despite the forces of diversification. We build a model that is consistent with the CAPM and explicitly allows for multiple securities whose cash flows are correlated. We demonstrate that the quality of accounting information can influence the cost of capital, both directly and indirectly. The direct effect occurs because higher quality disclosures reduce the firm's assessed ...

REVISION: The Importance of Reporting Incentives: Earnings Management in European Private and Public Firms
Date Posted:
Mar 15,
2006
This paper examines how capital market pressures and institutional factors shape firms' incentives to report earnings that reflect economic performance. To isolate the effects of reporting incentives, we exploit the fact that, within the European Union, privately held corporations face the same accounting standards as publicly traded companies because accounting regulation is based on legal form. We focus on the level of earnings management as one dimension of accounting quality that is ...

Firms' Capital Allocation Choices, Information Quality, and the Cost of Capital
Date Posted:
Jan 11,
2006
In this paper, we establish a link between information quality, firms' capital investment decisions and their cost of capital. We characterize asset prices in a market equilibrium framework with perfect competition for firm shares and derive a pricing equation that is equivalent to the CAPM. Using this characterization, we show that higher information quality leads to a lower cost of capital via its effect on expected cash flows. Better information improves the coordination between firms and ...

Cross Listing, Bonding and Firms' Reporting Incentives: A Discussion of Lang, Raedy and Wilson (JAE
Date Posted:
Sep 15,
2005
Lang, Raedy and Wilson (2006) examine the properties of U.S. GAAP accounting numbers provided by cross-listed firms and compare them to those of U.S. firms. Using a wide range of properties related to earnings management, timely loss recognition, and value relevance, LRW show that accounting data are not comparable across cross listed and U.S. firms, despite the fact that all firms use the same accounting standards. In this paper, I discuss how these findings advance the literature and what ...

Earnings Management and Investor Protection: An International Comparison
Date Posted:
Oct 18,
2004
This paper examines the pervasiveness of earnings management across 31 countries between 1990 and 1999. It documents systematic differences in earnings management across different clusters of countries. We propose an explanation for these differences based on the notion that insiders, in an attempt to protect their private control benefits, use earnings management to conceal firm performance from outsiders. Thus, earnings management is expected to decrease in investor protection because strong ...

Economic Consequences of SEC Disclosure Regulation: Evidence from the OTC Bulletin Board
Date Posted:
Oct 18,
2004
This paper examines the economic consequences of a recent regulatory change mandating OTC Bulletin Board firms to comply with the reporting requirements under the 1934 Securities Exchange Act. This change substantially increases the required disclosures for firms that previously did not file with the SEC. We document that the imposition of SEC disclosure requirements results in significant costs for smaller firms, essentially forcing them off the OTCBB. However, SEC disclosure regulation also ...

Economic Consequences of SEC Disclosure Regulation: Evidence from the OTC Bulletin Board
Date Posted:
Apr 19,
2004
This paper examines the economic consequences of a regulatory change mandating OTCBB firms to comply with reporting requirements under the 1934 Securities Exchange Act. This change substantially increases mandated disclosures for firms previously not filing with the SEC. We document that the imposition of disclosure requirements results in significant costs for smaller firms, forcing them off the OTCBB. SEC regulation also has significant benefits. Firms previously filing with the SEC ...

Proprietary versus Non-Proprietary Disclosures: Evidence from Germany
Date Posted:
Apr 16,
2004
Discretionary disclosure theory suggests that proprietary costs are an important reason why firms often withhold material information. However, empirically testing this hypothesis has proven to be difficult, due especially to the elusive nature of proprietary costs and lack of settings in which proprietary disclosures are voluntary. This paper exploits the fact that that until recently, German firms were not required to disclose business segment reports, which are generally viewed as ...

The Role of Accounting in the German Financial System
Date Posted:
Nov 25,
2003
This paper describes and analyzes the role of financial accounting in the German financial system. It starts from the common (international) perception that German accounting is rather uninformative. This characterization has its merits from the perspective of an arm's length or outside investor and when confined to the financial statements per se. But it is no longer accurate when a broader perspective is adopted. The German accounting system exhibits several arrangements that privately ...

IAS versus US GAAP: Information Asymmetry-Based Evidence from Germany's New Market
Date Posted:
Mar 07,
2003
Motivated by the debate about globally uniform accounting standards, this paper investigates whether firms using US GAAP vis-a-vis IAS exhibit differences in several proxies for information asymmetry. The study exploits a unique setting where the two sets of standards are put on a level playing field. Firms trading in Germany's New Market must choose between IAS and US GAAP for financial reporting, but face the same regulatory environment otherwise. Thus, institutional factors such as listing ...

Discussion of ADRs, Analysts, and Accuracy: Does Cross Listing in the U.S. Improve a Firm's Informat...
Date Posted:
Jan 28,
2003
Lang, Lins and Miller (2002) investigate the relation between cross listing in the U.S. and information intermediation by analysts. The results suggest that cross listing in the U.S. increases analyst following and forecast accuracy and that both variables are associated with Tobin's Q. These findings are interesting and advance the cross-listing literature in several ways. This discussion raises two issues. First, I highlight that the sources of cross-listing effects are not obvious and are ...

The Development of Voluntary Cash Flow Statements in Germany and the Influence of International Repo...
Date Posted:
May 20,
2002
This paper studies the incentives of German firms to voluntarily disclose cash flow statements. Although cash flow statements have not been mandatory in Germany until recently, an increasing number of firms have voluntarily provided cash flow statements. These firms are likely to be influenced by recommendations of the German accounting profession, IAS 7, and the respective standards of other countries. This paper studies this influence by looking at the adoption pattern of the cash flow ...

The Development of Voluntary Cash Flow Statements in Germany and the Influence of International Repo...
Date Posted:
May 20,
2002
This paper studies the incentives of German firms to voluntarily disclose cash flow statements over time. While cash flow statement are mandated under many GAAP regimes, its disclosure has not been mandatory in Germany until recently. Nevertheless, an increasing number of firms provides cash flow statements voluntarily. These firms are likely to be influenced by recommendations of the German accounting profession, IAS 7 as well as the respective standards of other countries. The idea of the ...

The Economic Consequences of Increased Disclosure
Date Posted:
Dec 12,
2000
Economic theory suggests that a commitment by a firm to increased levels of disclosure should lower the information asymmetry component of the firm's cost of capital. But while the theory is compelling, so far empirical results relating increased levels of disclosure to measurable economic benefits have been mixed. One explanation for the mixed results among studies using data from firms publicly registered in the US is that, under current US reporting standards, the disclosure environment is ...

The Role of Accrual Accounting in Restricting Dividends to Shareholders
Date Posted:
Nov 21,
2000
This paper addresses the question why net earnings and other accrual accounting numbers are frequently used to restrict dividends to shareholders. Even though this role of accrual accounting is widely accepted in the literature, a theory explaining the role of accruals in dividend restrictions is still in its early stages. Building on the principal-agent framework, I argue that basic features of the accrual process can be viewed as arising from the demand for dividend restrictions mitigating ...

An International Comparison of Accounting-Based Payout Restrictions in the United States, United Kin...
Date Posted:
Nov 09,
2000
Agency theory shows that payout constraints can play an important role in debt contracting and mitigating debt- related incentive problems. In this paper, we compare how, empirically, corporations in the UK, the USA and Germany are restricted in their ability to pay dividends (and other forms of payouts) to shareholders. Our study is novel in two respects: First, although there is ample evidence on the use of accounting-based payout restrictions in US debt contracts, and some evidence in the ...

An International Comparison of Accounting-Based Payout Restrictions in the United States, United Kin...
Date Posted:
Apr 25,
2000
Agency theory shows that payout constraints can play an important role in debt contracting and mitigating debt-related incentive problems. In this paper, we compare how, empirically, corporations in the UK, the USA and Germany are restricted in their ability to pay dividends (and other forms of payouts) to shareholders. Our study is novel in two respects: First, although there is ample evidence on the use of accounting-based payout restrictions in US debt contracts, and some evidence in the ...

The Role of Accrual Accounting in Restricting Dividends to Shareholders
Date Posted:
Feb 15,
2000
This paper addresses the question why net earnings and other accrual accounting numbers are frequently used to restrict dividends to shareholders. Even though this role of accrual accounting is widely accepted in the literature, a theory explaining the role of accruals in dividend restrictions is still in its early stages. Building on the principal-agent framework, I argue that basic features of the accrual process can be viewed as arising from the demand for dividend restrictions mitigating ...